Without disparaging dargie, I think his reasoning is shared by the market, and is precisely why some companies don't get the market recognition they should from a binding off-take (which is vastly different to an MOU, and the two should not normally be compared in the same category of de-risking, with the notable exception of a binding off-take with a multitude of "get-out" clauses). Unfortunately, a lot of people don't quite know the effect of one or the other.
I'm a banker, and I can speak from personal experience when I say that the two are vastly different things. One (MOU) is viewed by lenders as "oh, that's nice, but we'll discount it and assume it won't happen" while the other (off-take) is viewed by lenders as "bankable". Now there are a whole bunch of other things that get taken into account also, the next most important being who the party is that is committing to the off-take. If the buyer is (for example) me, then the bank will look at my bonafides, my history, and say that there is no comfort to be gained from an off-take with me, as I've never bought a tonne of graphite in my life, and don't have the business experience or infrastructure or balance sheet for the bank to get any confidence that I can pay for 50,000 tpa, and consequently the off-take, while binding, won't be worth the paper it's written on because the bank will know that they nor the company will realistically be able to enforce me to fulfil my part of the contract.
In this case however, I'd suggest the bank will not have a major concern with the buyer, other than general sovereign risk (of Chinese government changing their mind and policy), but that will be minimal in this case, as China clearly is trying to replace long term sources of graphite that are in the process of closing down for them in their own backyard.
Further, there is another reason why off-takes are so important, and they have the potential to hit the shareholders pockets directly, even if they don't realise it (which most don't, which is why share prices often don't get the bounce they should).
Off-takes are (usually) bankable documents (i.e. accepted by the bank). I don't know about LMB specifically, but I do know about another off-take for a company that I'm a holder in, and I know that that off-take was perused/drawn up in conjunction with the funder. Why is this important? Because it means that they are often already in a form acceptable to the funder. Funders often have requests for specific clauses to be inserted, or for other clauses to be amended, so as to make them more enforceable or palatable to the funder. This is not done formally per se, but rather the drafts are often shown to a funder (sometimes more than one, but usually one), who make their suggested changes, which are then incorporated into the document. This makes sense too, as the miner does not want an off-take that is not acceptable to the funder, particularly in a niche industry like graphite, as opposed to a fairly standard agreement that might be in place for coal or iron ore or other bulk commodoties.
And what follows from all this? The more comfort a bank gets from the off-take, the more debt they are willing to provide, and therefore the less equity that is required to be raised to fund the construction of the mine. This is where it makes a massive difference to the shareholders is. Let's have a quick look at two extreme positions (one is all debt, one is all equity).
LMB market cap $90m.
Capex $30m required.
If debt funded entirely, debt will cost something (I don't know resource mine interest costs, but possibly LIBOR plus 4-7%? Someone else may know more than me on that), which comes out of the cashflow, but no dilution occurs to the existing shareholders, who are earning well north of 20% ROE.
If equity funded, then a further $30m is raised, raking market cap to $120m, and diluting existing shareholders by 33%.
Now I'm not saying dilution is not necessarily a bad thing if cashflow increases, but in this case, the dilution of 33% will be much worse than the increased company cashflow because there is no debt costs to pay. Shareholders are much better off debt raising as much as possible, and paying cheaper interest costs rather than higher equity costs.
And if we fastforward a couple of years to when the mine capex is paid off, the company then has assets of $120m (or more) for what was previously a $90m market cap. Where is the share price going to go? UP (or if it doesn't go up, then the existing shareholders start getting a very, very good dividend return).
In summary, it is my firm view that off-takes are a highly valuable aspect of proving a resource's bankability (not a real word, but you get the point), and longer term investors will in time unlock significantly more value.
Stupidly, a mine can release drill results that upgrade a resource from 50 years in the ground to 75 years in the ground, and get a vastly bigger bounce from day traders and other investors, than if they announce an off-take that supports the bankability of the project, and keeps future dilution to a minimum. In time, it will be realised, but investors have to realise that if they think more like investors than traders, then they'll be making a good long term call, but it might be frustrating in the short term. Remember, the market is a beauty contest in the short term, not a rational viewing of value.
Buy the off-takes, people. A lot of people with more experience than us have perused the deal. Bankers and solicitors have perused the document. Buyers have stringently tested the resource product to make sure they want it. Management have modeled to make sure they can deliver what they are committing to. A lot of experienced eyeballs and hands have been on this process, and they ultimately prove worthwhile for a company if it's been done right (and at the right price). What price is ours? Oh yeah, that's right, delivering a $560m NPV. Not bad for a $90m market cap.
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